Spring Cleaning for Documents!

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Paper Purge!

What better time than tax time for purging documents? When you are knee deep in paperwork for your accountant or the TurboTax grind, tossing a few things is good for the soul. Before getting too excited, however, we offer a few guidelines.

What to Keep

A good deal of what you are keeping and will continue to keep are records you may someday present to an auditor working for the Internal Revenue Service (IRS). God forbid, but if you are ever audited, only records will substantiate your claims.

Less paper might be a natural outcome of the recent tax bill for those who will no longer be required to itemize expenses such as charitable giving. Using charitable deductions as an example, refer to IRS publication 526 for specifics but it does state that beginning in 2017 there is a reduction in total amount of certain itemized deductions including charitable contributions, if adjusted gross income is more than:

  • $156,900 if married filing separately,

  • $261,500 if single

  • $287,650 if head of household, or

  • $313,800 if married filing jointly or qualifying widow

Tax Returns and Forms

A general purge point for federal tax returns might be at least three years after filing. Three years is the general statute of limitations for being audited by the IRS, and so this could be the minimum time period for keeping tax records. For example, the 2017 return filed in April 2018 should be kept until April 2021, and an extension filed in October should be kept for three years following the October filing date.

The caveat here is that if the IRS suspects that income was understated by 25 percent or more, the statute of limitations for an audit extends to six years. Also, if you have bad debts or securities that became worthless, the IRS allows seven years to claim a loss. For these reasons, we recommend that you keep income tax returns for at least seven years after filing dates.  In addition to the returns, keep any records used in preparation of these returns for at least seven years in case the IRS asks for back up. This includes receipts and cancelled checks for deductions claimed, 1099 forms, proof of business income and expenses for a self-employed person, and statements for securities sold.

Another good reason for keeping returns for seven years is that state statute of limitations for auditing income tax returns can be longer than federal.  Examples given by TurboTax are Montana, which has a five-year statute, and Arizona and California, which have four-year statute of limitations. State periods for auditing if a return under reports income could be even longer. You might want to check with state authorities to be sure.




W-2 Statements and Social Security Benefits

Keep W-2 statements reporting compensation to compare them against Social Security earnings history. A statement of your earnings history used to determine Social Security benefits can be found online at www.ssa.gov. We do know of one case where the Social Security Administration did not accept copies of the W-2 statements, but if the SSA has recorded your earnings incorrectly, and if you have kept your W-2 statements, with persistence you should be able to get Social Security to correct its records.

Keeping Records for 7 Years – or Longer

Another tax form you should keep longer than seven years is Form 8606, filed if you ever made non-deductible contributions to an individual retirement account (IRA).  The IRS requires you to keep copies of forms 8606, 1099-R and 5498 until all of the money is withdrawn from your IRA accounts.

For gains records, amounts reinvested into a security add to the cost basis for tax purposes; higher cost means less taxable gain when you sell. Since 2011, brokerage statements are supposed to be tracking cost basis. For assets purchased before 2011, tracking down cost basis can be tricky. If your brokerage statement did not track the cost basis for an older asset, you might check income tax returns, if these dividends were being reinvested, to see if the dividends paid were broken out. The custodian for an investment might also be able to produce dividend reinvestment records, but this takes time and sometimes involves paying a fee. When transferring from one broker to another, make sure the cost basis transfers with the asset.  After you are confident that the accurate information is showing on the brokerage statement, you can toss the transaction confirmations reflecting the purchase.

Withdrawals from Roth IRAs are tax free.  Keep any records showing the conversion from a traditional IRA to a Roth because the IRS could very well take an interest in a transfer from a vehicle that will have taxable distributions into something that will avoid taxation when distributions are taken years later.

Gift tax returns should be kept forever.

Like IRAs, Health savings accounts (HSAs) shelter income from taxation, but only if funds distributed, which are reported on tax returns, are used for qualified medical expenses. Hold on to HSA distribution records, including corresponding medical expenses, for at least as long as you keep the respective tax returns.

Other Financial Statements

The only credit card statements to keep longer than a year are those showing expenses deducted on a tax return or any that might be involved in a disputed charge. Otherwise, toss them after one year. Even before that, after pairing non-tax-related receipts with your charge card statements, toss the receipts. Bank statements can be shredded after reconciliation.  Likewise, ATM receipts can be shredded after you see them on your bank statement.

Receipts for the purchases of valuables from jewelry and artwork to cars should be kept as long as you own the item since they can be needed for insurance claims and tax reporting. Appraisals will also be needed when filing insurance claims.

Insurance policies and current proof of coverage should be retained but statements for prior policy periods can be discarded. Along with homeowners insurance policies, keep a household inventory in a safe place. If your house burns down, you will be penalized for not having a detailed home inventory.

Home Documentation

Keep all settlement paperwork for home purchases as long as you own the home and until you discard the tax return that documents its sale.  Keep all home improvement records and receipts for larger purchases and renovations. When the home is sold, all improvements need to be added to the tax cost to reduce a gain.

Keep all proof of loans and especially loan payoffs for everything from home loans, car loans and student loans.

Divorce and Child Support

Keep final records of divorce, including alimony and child support, forever. In the case of an acrimonious divorce, these records could fill a barn so you will need to be selective. Maybe wait until fresh wounds have healed to tackle this one.  

Records for Life

Wills, trust documents, power of attorney documents, birth, marriage and death certificates and military discharge paperwork will come in handy forever. These are so important that you might want to consider keeping them in a safe deposit box.

What to Toss

There are no hard and fast rules for record retention. Unfortunately though, the above list probably leaves you with a depressingly large stash of records that you need to keep. For some immediate gratification, yank open your warranty file and toss all of the receipts from the toasters, coffee makers, software, computers, tools and appliances that you threw out years ago.

Shred it!

For your own protection, turn your tax season file weeding into an annual ritual.  Pick through your files and destroy information that does not need to be retained. Shred anything that reveals personal information such as account numbers, social security numbers and birth dates with a goal of keeping private and confidential information out of the wrong hands.



-Presented by Mary Lou Smart, RPQPand Operations Manager

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